A Tale of Two Chinas

By Dave Smith, Senior Contributor, USDR.

“Ever since Adam Smith there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading companies and of the world.” – Milton Friedman, The Case for Free Trade

With recent trade negotiations between China and the United States ending without a resolution to the Sino-American trade war, the trade practices of the People’s Republic of China have remained under scrutiny. But the protectionism of the PRC belies the fact that with regard to trade and prosperity, there isn’t one China, there are two: Communist China and capitalist Hong Kong.

A “sparsely inhabited island off the coast of Southeast China”, in 1841 Hong Kong became a possession of the British Empire with the Convention of Chuenpi. 19th Century Britain rose to economic grandeur through expansion of unilateral free trade: from the repeal of the Corn Laws in 1846 to Gladstone’s slashing of import tariffs, free trade brought prosperity to the Empire. Along the way, Hong Kong became an active port colony and a gateway for trade between the East and the West.

Post World War II and following the establishment of a communist regime on the Chinese Mainland, Hong Kong added industry, finance, and real estate development to its repertoire. Buoyed by the free economy, Hong Kong grew from a small port to an economic giant, and prosperity followed – the tiny island became one of the most prosperous nations in the world, with per capita GDP and average wage among the world’s highest – ahead of such powerhouses as Germany, Japan, and its former colonizer, the United Kingdom.

Dave Smith Said That

Meanwhile, a different storyline was unfolding on the mainland. The communist regime under Mao Zedong pursued a different course: a command-control economy, withdrawn and isolated from much of the world. The shackles of Chairman Mao’s Great Leap Forward resulted in widespread famine that killed as many as 45 million people… and perhaps even more. Lack of trade with the rest of the globe and poor planning combined with an inefficient economic model to leave the Chinese worker with practically no change in wages from the establishment of Mao’s regime until the 1980s.

The divergence could be difficult to overstate: the small harbor was an economic power, the large nation, full of national resources, was in economic shambles.

Following the death of Chairman Mao, successor Deng Xiaoping began implementing reforms to open up the Chinese economy, moving it towards more market-oriented policies (albeit still authoritarian) and away from collectivism. As a result, mainland China’s economy began growing, and the resulting prosperity carried millions of Chinese out of abject poverty. While still largely protectionist, China began cutting tariffs and engaging the global economy in trade. Between 1992 and 2017, China cut average tariffs from 40.75% to 7.7%. It joined the World Trade Organization in 2001.

As per treaty, the UK returned Hong Kong to the People’s Republic on July 1, 1997, integrating the largely autonomous and free market city-state with the communist mainland. Perhaps not wishing to kill the goose laying golden eggs, China implemented a “One Country, Two Systems” policy that has allowed Hong Kong to maintain a “high degree of autonomy”, independent judiciary, and freedom of speech. As a result, Hong Kong’s official policy is to remain “a free port”; they “pursue a [unilateral] free trade policy and do not maintain barriers on trade”. As a result, “No tariff is charged on import or export of goods.” Hong Kong retains its own seat in the WTO, and remains in the #1 position in the Economic Freedom Index of both the Cato Institute and the Fraser Institute.

Post-World War II, the two Chinas took different forks in the road: Hong Kong turned towards free market capitalism and forged a path of economic prosperity; China turned towards protectionism and economic isolation and suffered poverty and famine. As the Chinese government has (slowly) implemented reforms and become more like Hong Kong, its prosperity has increased, but it still lags behind the “1st World Countries” in wages and GDP per capita, with millions still in poverty.

The Tale of Two Chinas is a stark reminder that free market principles and economic liberty promote prosperity and growth.

Born in the same county as Davy Crockett in East Tennessee, Dave found his way to Texas where he works in the petrochemical industry. He’s written and spoken about politics on various media outlets including Fox, ABC, and Townhall. He is a graduate of Tennessee Tech with a degree in chemical engineering. Make sure to check out Dave’s popular series, “Profiles in Liberty” at USA Daily Chronicles. Follow Dave on Twitter: @semperlibertas.

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.